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THEORY
Chapter 5
OUTLINE
Overview Product life-cycle
Mercantilism
theory
Absolute advantage
Comparative advantage New trade theory
Heckscher-Ohlin theory Porter’s diamond
Implication for
managers
Closing case
OVERVIEW
Free trade:
Government does not attempt to
influence, through quotas or duties, what
its citizens can buy from another country,
or what they can produce and sell to
another country.
OVERVIEW
The benefit of trade:
A country may gain even if they buy products
from other nations.
Allow a country to specialize in the
manufacture, and export products that can
be produced most efficiently in that country.
OVERVIEW
The pattern of International Trade:
Some are easy to understand
(Saudi Arabia/oil or Mexico/labor intensive
goods)
Some are not so easy to understand
(Japan/cars)
MERCANTILISM
MERCANTILISM (mid-16th century)
1) LOCATION:
Firm disperse its productive activities to
3) GOVERNMENT POLICY:
Lobby to promote the free trade or restriction, to
adopt the policies that have favorable impact (on
each component of Porter Diamond)
Example: tariff on Japanese LCD makes the price of
IBM laptop increase.
CLOSING CASE
SUMMARY
Logitech: The world largest producer of computer
mice, a technological innovator in business of
personal computer peripheral.
Founded in 1981, Switzerland.
Differentiate their products by continuing
innovation (91 new products in 2003), high brand
recognition, strong retail presence.
SUMMARY
R&D (software programming) in Switzerland
Corporate headquarter in Fremont, California –
the headquarter for the company’s global
marketing, finance, logistic – close to many of
American’s high-technology enterprises.
Design product in Ireland.
Manufacture in Asia
SUMMARY
Manufacture in Asia:
1980s - Taiwan: qualified people, high volume, low cost
⇒ Others invest
SUMMARY
Manufacture in Asia:
1990s – China: 4000 employees: young women, each
Motorola, Intel,.....
Top exporter of high-tech export: chip,
disk driver,..
QUESTION 1, 2, 3
1. In a world without trade, what would American consumers
have to pay for Logitech’s products?
2. Explain how trade lowers the costs of making computer
peripherals such as mice and keyboards.
3. Use the theory of comparative advantage to explain the
way in which Logitech has configured its global operations.
Why does the company manufacture in China and Taiwan,
undertake basic R&D in California and Switzerland, design
products in Ireland, and coordinate marketing and
operations from California?
QUESTION 1
In a world without trade, every parts of
process to produce goods of Logitech must
be made at USA.
Fair: marketing, R&D and design quality.
High cost: labor, supply.
No specialization.
American consumers suffer higher cost.
QUESTION 2
Activities of Logitech in trade to lowers
the costs of making computer is shown
following
QUESTION 2
QUESTION 3
Logitech will put its production where it
can be completed most efficiently:
China and Taiwan low labor and supplies
resources.
California and Switzerland high technology.
Fremont communication gate to the World.
QUESTION 4
Who creates more value for Logitech, the
650 people it employs in Fremont and
Switzerland or the 4,000 employees as its
Chinese factory? What are the
implications of this observation for the
argument that free trade is beneficial?
FREE TRADE IS BENEFICIAL
Logitech (company):
FREE TRADE IS BENEFICIAL
Chinese and Taiwan factories (being outsourced):
FREE TRADE IS BENEFICIAL
American (customers):
QUESTION 4
! 4000 Chinese labors !
Why???